Author(s)

Robert Frontczak, Michael Jaeger, Bernd Schumacher

Credit Risk Unit, Landesbank Baden-Württemberg (LBBW), Stuttgart, Germany.

Measuring model performance of rating systems is a major task for banks. The concept of discrimination, i.e. the discriminative power, is used in credit risk modeling to assess the quality of a risk model concerning the separation of extreme events. For PD models CAP (Cumulative Accuracy Profile) or ROC (Receiver Operating Characteristic) curves are used to build a quantity called Accuracy Ratio, which is used to measure the discriminative power. These ideas are well known and broadly used in practice. Although such a measure is also desirable for models of the loss given default (LGD models), it is not documented in the literature. In this note we close this gap. We develop a measure for the discriminative power of LGD models based on Lorenz curves. We study first properties and introduce some alternatives for its calculation from a practical point of view.

LGD Model, Lorenz Curve, Gini Index, Power Ratio

Frontczak, R. , Jaeger, M. and Schumacher, B. (2017) From Power Curves to Discriminative Power: Measuring Model Performance of LGD Models. Journal of Mathematical Finance, 7, 657-670. doi: 10.4236/jmf.2017.73034.